Lecture 3 - Property, Plant & Equipment (Continued) Flashcards
PPE?
tangible items used in the production/supply of goods/services
expected to be used for more than one accounting period
what causes depreciation?
the usage of an asset over time
when does depreciation begin and end?
- begins when the asset is available for usage
- ends when the asset is either derecognised or classified as held for resale
cost model?
PPE is valued at cost less accumulated depreciation less impairment loss
revaluation model?
PPE is valued at fair value less accumulated depreciation less impairment loss
components of PPE?
significant parts of the PPE
how are ‘items’ of PPE determined?
judgement whether or not items belong in the same group
can be based on similar function, useful life etc
what constitutes the cost of PPE?
purchase price + cost of making it fit for use + cost of removal
what does ‘cost of making it fit for purpose’ constitute?
installation cost
transportation of the PPE cost
testing cost
what does cost of removal constitute?
cost of dismantling, removing or disposing the asset
what constitutes faithful representation?
- complete
- neutral
- free from error
when does depreciation cease?
when classified as held for resale or derecognised
how is impairment loss calculated?
carrying amount - recoverable amount
recoverable amount = ?
higher of:
- fair value - cost of disposal
- VIU (PV of future cash flows)
goodwill?
intangible asset arising from when a company is purchased for a premium
internal goodwill?
value build up within a company through its own operations (e.g., brand reputation, know-how/expertise)
criteria for recognising PPE?
- future economic benefit
- can be reliably measured
- asset is controlled by the entity
when is the cost/revaluation model introduced?
after initial recognition
from the second financial year onwards
initial recognition is cost
journal entry when carrying amount of asset increases?
debit asset, credit revaluation surplus
revaluation surplus?
an equity account
stores revaluation increases in the carrying amount of PPE after it’s been revalued to reflect its fair value
if the asset was impaired before and an impairment loss was recognised in the P&L, what do I do with the carrying amount?
carrying amount increases by the same extent necessary for reversal
when carrying amount decreases, what is the journal entry?
debit the P&L for the expense
if the asset was revalued to revaluation surplus, how is a decrease in carrying amount treated?
decrease in carrying amount is debited to the equity account to the extent necessary for reversal of the revaluation surplus
PPE is derecognised when…
either it is:
- disposed of
- no future economic benefit is expected
gain/loss =
proceeds on disposal minus carrying amount
how are gains/losses on disposals treated?
they go in the P&L as a gain on disposal of PPE under non-operating income
an asset costed £30,000, accumulated depreciation is £10,000, and was recently sold for £5,000
what is the gain/loss?
proceeds on disposal minus carrying amount
5,000 - (30,000 - 10,000) = -15,000
15,000 loss
when does impairment occur?
when CA > RA
RA?
recoverable amount
higher of VIU or FV less cost of disposal
CA?
carrying amount
aka net book value (NBV)
cost - accumulated depreciation
external/internal indications of impairment?
external = decrease in market value
internal = obsolescence/ physical damage
if fair value less costs of disposal OR VIU exceed carrying amount, what does this mean?
there’s no impairment
how is impairment loss recognised with cost model?
if using cost model: dr impairment loss (P&L), cr asset
how is impairment loss recognised with revaluation model?
if using revaluation model: dr revaluation surplus, cr asset
if there’s no revaluation surplus, impairment for revaluation is recorded as an expense in the P&L
what type of expense is depreciation?
operating expense
how are gifted assets recognised in the SOFP?
initially at cost, which is 0
subsequent accounting periods, recognised at fair value
